Examining the nexus between climate change risks and bank liquidity in China: evidence from the method of moment quantiles

Hatem Brik and Asma Houcine

Journal of Financial Regulation and Compliance, 2025, vol. 33, issue 5, 760-783

Abstract: PurposeThe purpose of this study is to investigate how climate risks impact bank liquidity in China, a major global economic player facing distinct environmental challenges.Design/methodology/approachThe analysis covers data from 53 Chinese banks from 2010 to 2022. Pooled Ordinary Least Squares and Quantile Panel Regression Models are used to examine the relationship between climate risks and key liquidity metrics, including the Loan-to-Deposit (LTD) ratio and Liquidity Coverage Ratio (LCR).FindingsThe results reveal that banks with low LTD ratios expand lending to support green projects. In contrast, banks with high LTD ratios adopt conservative strategies to mitigate risks from rising NPLs and asset volatility. In addition, this study finds that climate risks influence LCR differently across banks: High-LCR banks face asset devaluation risks. While Low-LCRS banks prioritize compliance with regulatory requirements.Research limitations/implicationsThe findings are limited to Chinese banks, which may limit their generalizability to other regions with different banking systems and climate risk exposures. Moreover, the authors primarily address the immediate impacts of climate risks, leaving unexplored the long-term cumulative effects of repeated climate shocks, unpredictable climate events or policy shifts on bank liquidity.Practical implicationsThe findings may help regulatory bodies formulate policies that require banks to integrate climate risk into their liquidity management strategies. This might include mandatory disclosure of climate-related financial risks and adherence to sustainable banking practices. Policymakers can use these findings to develop targeted interventions to support banks in managing climate risks, such as providing incentives for green financing and investments in climate-resilient infrastructure.Social implicationsThe findings have broader societal impacts, influencing public policy and awareness. Strengthening climate risk management within banking can enhance economic stability, protect jobs and support sustainable development. Policymakers can leverage these insights to design regulations that promote responsible lending and investment in climate-resilient infrastructure, ultimately fostering a more sustainable and equitable financial system. Raising awareness of these risks among businesses and the public can encourage proactive risk management and responsible financial decision-making, contributing to the broader goal of sustainable economic development and societal resilience.Originality/valueGiven China’s unique economic structure, regulatory landscape and climate challenges, this analysis offers a distinctive perspective compared to broader, more generalized studies. Furthermore, the authors use an innovative and novel analytical approach based on the Quantile Panel Regression Model to assess the impact of climate change on bank liquidity, significantly enhancing the originality and depth of this research.

Keywords: China; Climate change; Advanced econometric analysis; Bank liquidity risk; Method of moment quantiles (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jfrcpp:jfrc-09-2024-0188

DOI: 10.1108/JFRC-09-2024-0188

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